Wednesday, July 13, 2022

Revolutionary Peer-to-peer Payments vs. Evolutionary Central Bank Digital Currencies (CBDCs)

There is a new proposal from Visa that will enable “interoperability between central bank digital currencies (CBDCs) and other stablecoins.” This comes after various countries around the world have been researching and testing CBDCs, while simultaneously the private sector has raced ahead with competing fiat-backed stablecoins.

The big question has always been whether the different stablecoin systems would be able to interface with each other. The independent market participants, regardless of whether they are nation states or private companies, have very little incentive to create the interoperability. This turned the conversation to large payment players like Visa, which stood to benefit by serving as an integrator of all types of stablecoins and CBDCs.

This is essentially what Visa is proposing with their new system. Any stablecoin or CBDC will be able to be used with any other stablecoin or CBDC as long as it interfaces through Visa’s system. I’m generally a big fan of what the Visa team is doing, and have been incredibly impressed by their open-mindedness when it comes to this new industry, but this new system feels like a re-creation of the legacy centralized system.

According to Coindesk, “the UPC protocol will allow payments through an entity known as the ‘UPC Hub’, acting as a trusted gateway to read the state of two ledgers, checking the eligibility of every payment.” According to Visa, “the UPC technology can play an important role between private stablecoins and public CBDCs by providing permissioned access for whitelisted stablecoins to be interoperable with CBDCs.

This Visa proposal essentially creates a new type of third party clearing house for all transactions, while also re-creating a new permission mechanism. The technology is superior to the legacy technology. There is no denying that. But it doesn’t fundamentally change the way payments are done. It is simply an evolutionary approach to payments, rather than a revolution.

It is obvious why the incumbent banks and financial organizations want to use evolved payment technology. It helps them continue to protect their dominant market position. But the future is not rooted in evolutionary advancement. The revolution is what will propel us forward.

Payments are entering a weird period of transition. The centralized entities and third party clearing houses want to continue the status quo as much as possible. Their businesses depend on it. The challengers are poised to leverage decentralized systems that treat everyone the same and require no one’s permission to use. While it is easier to see a centralized future, mainly because it is most like the past, the future will be decentralized in my opinion.

With that said, Visa’s move here is forward thinking compared to their incumbent peers. Most companies are still denying the value and potential of these new technologies. Visa is attempting to carve out a position of importance for themselves and sitting at the intersection of all stablecoins and CBDCs is a pretty great place to stake your claim.

Keep your eye on this as we move forward. The incumbents will continue to embrace the evolutionary technology. Regulators will be much more comfortable with it in the short to medium term. But the long game here is a decentralized digital currency that is controlled by no one, accepting of everyone, and can’t be manipulated by central banks or nation states.

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